NCLT ND-IV (12.09.2022) in M/s Concord Infrastructure Pvt. Ltd. Vs. M/s Shubhkamna Buildtech Pvt. Ltd. [C.A.1/ND/2020 in C.P. No. IB-1059/ND/2018] held that;
It is clear that Section 66 of the Code, 2016 contemplates that during the CIRP or liquidation process if it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order.
Excerpts of the order;
The instant application has been filed on behalf of Mr. Anand Sonbhadra (`applicant/resolution professional) under Section 66 of the Code, 2016 to bring fraudulent and wrongful transactions done by the suspended board directors of the corporate debtor to the notice of this Hon’ble Tribunal seeking the following relief(s):-
a) to direct the suspended Directors of the Corporate Debtor, i.e. Mr. Piyush Tiwari, Mr. Diwakar Sharma and Mr. Deep Tiwari, to contribute INR 106. 19 crores.
b) report the transactions to the Insolvency & Bankruptcy Board of India for making a complaint to the Special Court under section 236 of the Code.’
2. Briefly stated, the facts of this case leading to filing of this present interlocutory application, as averred by the applicant are as follows:-
a) The applicant submits that the Corporate debtor i.e., M/s. Shubhkamna Buildtech Private Limited is engaged in the business of real estate construction and development and was in the process of developing the projects on a plot of land admeasuring 22565.77 sq/mts bearing plot no. GH-05/B is situated at Sector 137, Noida.
b) The applicant submits that Corporate Insolvency Resolution Process against M/s. Shubhkamna Buildtech Private Limited (`Corporate Debtor’) had been initiated vide Hon’ble NCLT order dated 26.11.2018 in C.P.(IB)No. 1059/2018, petition under Section 9 of the Code, 2016 filed by M/s. Concord Infrastructure Private Limited (Operational Creditor’).
c) The applicant submits that the Committee of Creditors in its 2nd CoC meeting held on March 11, 2019 had approved the appointment of forensic auditor M/s. Haribhakti & Co. LLP to conduct the forensic audit of the books, records, papers, documents accounts and transactions relating to the corporate debtor.
d) The applicant submits that the forensic auditor conducted the forensic audit and submitted the report with its comments on 06.10.2019. The applicant submits that on perusal of the forensic audit report and the accounting data available with the applicant, the applicant has determined that certain transactions falling within the purview of preferential, fraudulent or undervalued transactions that have been carried out by the suspended management of the corporate debtor.
e) The applicant submits that the applicant has averred that monies siphoned off under avoidable transactions amount to INR 106.19 crores towards diversion of funds to a foreign related entity, personal expenses incurred from the account of the corporate debtor, questionable transactions carried out with supposed suppliers, potential diversion of funds to related entities, misappropriation of assets of the corporate debtor, unreasonable reduction in value of land in the books of the corporate debtor, potential diversion of monies to related/ unrelated parties in the form of interest free loan. The applicant further submits that the amount siphoned-off is summarized as below:-
f) The applicant submits that the fraudulent transactions as enumerated above, have been carried out by the respondents with the sole intent of siphoning off cash from the Corporate Debtor and by thus dissipating the assets of the Corporate Debtor, to leave little for distribution among the creditors of the Corporate Debtor.
g) The applicant submits that from the forensic report, it can be clearly established that the Directors/Corporate Debtor has entered into several fraudulent transactions thereby prejudicially affecting the rights and interests of the lenders / financial creditors of the Corporate Debtor and that the same are clearly in contravention of inter alia the provisions of section 66 of the Code.
# 3. We have heard Ld. Counsel for the applicant and perused the averments made in the application. The relevant documents annexed with the application have been examined in detail. The respondent had neither filed their reply nor appeared before this Adjudicating Authority for arguments in the C.A./01/ND/2020.
# 4. Before proceeding further on the matter, it would be appropriate to refer to Section 66 of the Code, 2016 relating to fraudulent transaction, which reads as under:
“Section 66: Fraudulent trading or wrongful trading.
1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.”
(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if–
(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
(b) such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor.
(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.”
# 5. In order to bring the transaction within the scope of Section 66 of the Code, 2016, it is necessary to demonstrate that the business of Corporate Debtor has been carried on with the “intent to defraud” its creditor or for “any fraudulent purpose”. Further, Section 66(2) of the Code inter-alia mandates that the directors of the corporate debtor ought to have known that there was no reasonable prospect of avoiding the initiation of the CIRP and the directors did not exercise due diligence in minimizing the loss. Therefore, test is to look into the purported/alleged fraudulent transaction and to ascertain whether the alleged transactions established that the alleged transaction were made with intention to defraud and for fraudulent purpose
# 6. In support of the averments made in the application, the Ld. Counsel for the applicant had relied upon the Forensic Report dated 06.10.2019 and invited attention of this Adjudicating Authority towards diversion of funds to a foreign related entity, personal expenses incurred from the account of the corporate debtor, questionable transactions carried out with supposed suppliers, potential diversion of funds to related entities, misappropriation of assets of the corporate debtor, unreasonable reduction in value of land in the books of the corporate debtor, potential diversion of monies to related/ unrelated parties in the form of interest free loan as enumerated at Pg-31 of the Forensic Report dated 06.10.2019.
# 7. At this juncture, it is significant to refer to the decision of the Hon’ble Supreme Court in the matter of Anuj Jain IRP for Jaypee Ifratech Limited vs. Axis Bank Limited [Civil Appeal No. 8512 -8527 of 2019], wherein it was held that
“29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of under valuation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/ fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirement in view, while making a motion to the Adjudicating Authority.
# 8. Therefore, from the Jaypee Infratech case cited above, it is clear that Section 66 of the Code, 2016 contemplates that during the CIRP or liquidation process if it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order.
# 9. A perusal of the forensic report and its contents, relevant Tally entries of the books of the corporate debtor showing payments to related entities, travel expense, personal expenses of director accounted in the corporate debtor’s account, explicitly reveals the fact that the corporate debtor has clearly consequently made the payments, which were not used for the business of the Corporate Debtor but otherwise and the said act of the suspended directors of the corporate debtor will squarely attract under the provisions of Section 66 of the Code, 2016. Consequently, the respondents herein i.e., Mr. Piyush Tiwari, Mr. Diwakar Sharma and Mr. Deep Tiwari, are directed to immediately contribute a sum of INR 106.19 crores, which was siphoned-off by the respondent, while managing the affairs of the Corporate Debtor within a period of 21 business days from the pronouncement of this order. The respondents shall be jointly and severally liable to contribute a sum of INR 106.19 crores, which was siphoned-off by the respondents while managing business of the corporate debtor.
# 10. We find that the Resolution Plan approved by the COC in its 6th meeting and submitted before this Tribunal for approval specifically provides for treatment of recoveries arising out of avoidance transactions. The Clause 7.5 of Chapter VII, pg 29 of the Resolution Plan dated 12.10.2019 as approved by the COC is reproduced below
“Chapter VII- Funding Plan and Sources of Funds
7.5. Passing of Benefit to Financial Creditors accruing from Avoidance Transaction:
The CD/ RA shall extend all possible cooperation for adjudication of any transactions u/s 43, 45, 49, 66, if any. 100% of the Net Amount received through Bank Transactions (if anti) directed by the Adjudicating Authority that is received by the CD in respect of such transactions shall be passed on to the Financial Creditors in pro rata basis of the repayment of claims as proposed by the RA. If the land that has been sub-leased to AEPL comes back in the name of the CD at a later date, the Land/ FSI shall be sold and the receipts (net of cost) shall be distributed amongst the home buyers in pro-rata basis. Alternatively the FSI can be developed by the RA/ CD and the cost of FSI shall be distributed amongst the Home Buyers in pro-rata basis once the entire inventory is sold and all the proceeds are received by the RA/ CD. Further if any asset of SHUBHKAMNA which is not present in the Information memorandum / Balance sheet, is discovered in future during the resolution then 100% of the net benefit from their recovery will be passed on to the financial creditors in pro-rata basis of the repayment of claims as proposed by the RA. “
# 11. In view of the aforementioned facts and the discussion, we are of the considered view that respondents i.e. suspended board of directors were involved in running the business of the corporate debtor in a fraudulent and wrongful manner, therefore, responsible and liable under the provision of Section 66 of the Code, 2016.
# 12. Accordingly, the instant application i.e., C.A./O1/ND/2020 stands allowed, with a direction to the suspended board of directors i.e., Mr. Piyush Tiwari, Mr. Diwakar Sharma and Mr. Deep Tiwari, to deposit this aforesaid amount of Rs.106.19 crores with this Adjudicating Authority within two months from the pronouncement of this order, which shall be distributed to financial creditors proportionately.
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